Trying to make sense of OmniVision (again!)

Also, update on the Senate's peek into short-selling

By

HerbGreenberg

SAN DIEGO (MarketWatch) -- Something doesn't make sense at OmniVision. Then again, something hasn't appeared to make sense each time I've written about the company, as the stock has gone from $19 to $13 on its way to $34 and now back down to $22. Such volatility is what happens at companies where things don't make sense.

They didn't make sense in prior quarters when prices at the maker of camera chips for cell phones were falling but margins were flat or rising. OmniVision
OVTI, +0.00%
explained away the discrepancy as having to do with product "mix" to higher-margin products. Now both prices and margins are falling, which is the way it should be, but suddenly there has been a shift to lower-margin products. (Don't ask me: I just report this stuff.)

Other noteworthy (and not necessarily making sense) items from the most recent quarter: A 30% rise in sales to China from the prior quarter while sales through distributors, during the same period, leaped 32%.

How much of the increase in sales to distributors were to distributors in China? The company won't say. "The increase in revenues from China and the increase in revenue from distributors are separate metrics," a spokesman says via e-mail exchange -- his preferred method of answering my questions. He adds that all sales from distributors are recognized only after the distributor sells goods to an end customer. (Which, of course, begs the question: Who are the end customers?)

Meanwhile, as for the reason for such a pronounced increase in China sales, the spokesman says, "It's important to remember that a significant amount of the world's electronic products are now manufactured in China." He goes on to explain how an American handset manufacturer could be buying camera modules from OmniVision yet "still have us deliver sensors to their module factory in China."

Those kind of sales, it should be noted, are booked as revenue when they leave OmniVision's factory. Why would there be such a big shift to China in a single quarter? "China, Hong Kong and Taiwan are dynamic and highly competitive environments," the spokesman says. "Companies are constantly looking to have the most efficient and cost-effective supply chain, which will from time to time change our mix between these geographies."

Also interesting to note: When it comes to China, according to the company's proxy, Jeanette Ishibashi, daughter of CEO Shaw Hong, was "our director of China operations," receiving total annual compensation of $140,933. The spokesman says Ishibashi -- who reports to Raymond Wu, OmniVision's executive vice president and co-founder -- is responsible for administrative operations in China, overseeing such functions as human resources.

Since when does someone responsible for human resources in a region earn nearly $141,000? The spokesman responded that "compensation of each employee is decided on a case-by-case basis. In her case, she has additional responsibilities outside China." Additional responsibilities outside China? Does that mean Ishibashi's job been expanded since the proxy was printed last September? The spokesman declined to elaborate.

But, wait, there's more: In an SEC filing earlier this week, OmniVision disclosed bonuses as of April 30 and raises -- effective July 1 -- for its top executives. Noticeably missing: CFO Peter Leigh, the latest in a revolving door of chief financial officers, whose name was in a similar 8-K a year ago as well as several others last year that spelled out bonuses.

The company insists Leigh still works at OmniVision, but it doesn't explain why he didn't get a bonus or a raise and why his salary of $260,000 will be less than that of the company's legal and engineering vice presidents. Was that an error? "It was not an error that Peter's name was not in the 8-K," the spokesman says.

Why, then, didn't he receive a raise or bonus? Is he on a fixed salary? Did he receive options in lieu of a raise or bonus? (If so, why not say so?) Will he be signing the 10-K? Will he be employed by OmniVision after July 1? The spokesman declined to elaborate, other than to say Leigh will be signing the company's 10-K and will be employed by OmniVision after July 1.

Finally, there's the puzzle as to why investors treat OmniVision as a growth company. Based on the midpoint of guidance for the quarter that ends in July, revenues over the six-month period from the quarter ended last January will have grown only 2%, while earnings per share during the same period will have fallen by nearly 25%.

Lower earnings on higher revenue? Drats, those falling selling prices. I know, I know: It's all about future products and future design wins. However, saying it is one thing; making it happen, another.

Speaking of blogs

From my blog, this update to Tuesday's story on a Senate hearing into short-selling: The Senate Judiciary Committee changed the name of its June 28 meeting to "Hedge Funds and Independent Analysts: How independent are their relationships." It had previously been focused on "short-selling activities" of hedge funds and independent research.

While a good start, the name change still misses the point: The hearing, for credibility's sake, should be an examination of the relationship between independent research and all institutional investors. Hedge funds are hardly the only subscribers to these services. Others include the country's biggest (and, possibly, smallest) mutual funds as well as pension funds and others. Unfortunately, they're hardly as sexy, from a populist point of view, as hedge funds.

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